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Futures Slide, Global Rally Fizzles As Trade Talks Begin

U.S. stock futures slumped more than 25 points from overnight highs and European equities dropped and Friday's "jumbo" 747 point surge in the Dow lost momentum as trade talks began in Beijing between the U.S. and China, with both sides pressured by concerns over the economy and market jitters. Chinese Vice Premier Liu He unexpectedly attended the first day of talks, Bloomberg reported, to discuss topics including IP, agriculture and industrial purchases in the first formal meeting between the two sides since Donald Trump and Xi Jinping agreed to a 90-day truce on Dec. 1. The dollar fell to the lowest in more than two months against peers.

S&P futures slumped back to red, after gaining as much as 0.8% shortly after the session open, as European equities drop shortly after the open, its third drop in four sessions, and reversing a broad rally in Asia, led by Japanese shares.

European shares slumped right off the start after a stellar opening for Asian bourses helped by the weaker dollar, pushing MSCI’s world equity index, which tracks shares in 47 countries, to its highest level in 2-1/2 weeks, and 6% higher than its December trough. The Stoxx 600 drops 0.4%, dragged by food and beverage sector after beer producers downgrades by Goldman Sachs. Additionally, German factory orders fell more than expected in November. Orders slid 1% from October, and posted a year-on-year decline of 4.3%, the biggest in more than six years

After gains of more than 2% in Shanghai and HK on Friday before the U.S. jobs data and Powell’s comments, both markets added to gains on Monday, with the Shanghai Comp. (+0.7%) and Hang Seng (+0.8%) confirming to the positive tone following the RRR cut announcement and with mid-level trade discussions set to resume between US and China today, although the mainland lagged its regional peers following a CNY 170bln liquidity drain by the PBoC. Japan’s Nikkei reversed Friday’s plunge to gain 2.4%.

“It is a reminder that central banks still have some firepower to deal with lower growth prospects, and perhaps what we are also getting some return of liquidity as investors return from the holidays and the ability to think things through,” said Investec economist Philip Shaw. He warned, however, that there is continued uncertainty about global growth, trade talks between the United States and China and U.S. monetary policy. “There are a number of questions that remain unanswered,” Shaw said.

Elsewhere, emerging-market shares jumped, and the Korean won, Malaysian ringgit and the Indonesian rupiah led gains in major currencies.

Treasury yields fell following Friday's biggest one-day percentage surge in two years amid a broad-based rotation out of bonds and into stocks.

The Bloomberg Dollar Spot Index stayed on the back foot on soft Fed rate-outlook pricing and slid to its lowest level since Oct. 18 as Treasuries gained.Tthe pound slipped against the euro as U.K. lawmakers sought to avoid a no-deal Brexit. The euro currency remained solidly up even as data showed German factory orders fell more than expected in November.

US President Trump and Chinese President Xi Jinping are reportedly mulling a potential summit in H1 2019 if progress is made in trade talks which begin today in Beijing according to sources. Elsewhere, US President Trump renewed his threat to invoke a national emergency as a way to circumvent Congress and build a wall on the southern US border in which he warned he may declare a national emergency dependent on what happens over the next few days.

In the latest Brexit developments, UK PM May warned that Britain would be in unchartered territory if her Brexit deal is rejected by parliament and said the vote would be held around 15th January as expected. May also left open the possibility of a 2nd referendum but stated that this is not a course of action she wanted to follow. More than 200 UK lawmakers from the Conservative and opposition parties have signed a letter to UK PM May asking her to rule out the option of a No deal Brexit. (Newswires) This also comes in the context of reports stating that Parliament will vote on two amendments to the finance bill on Tuesday that would result in a government shutdown unless UK PM May is able to secure support for her Brexit deal.

In geopolitical news, a US destroyer has sailed near the Parcel Island chain to challenge China's excessive maritime claims. Subsequently, China’s Foreign Ministry say they have sent a vessel to verify this, and warn it off. Adding that US action in the sea has violated law, and China has urged the US to stop these actions.

Expected data include ISM Non-Manufacturing Index, while the publication of factory orders is delayed because of the government shutdown. Commercial Metals is reporting earnings

Market Snapshot

S&P 500 futures down 0.1% to 2,528.50

STOXX Europe 600 down 0.4% to 342.15

MXAP up 1.9% to 148.38

MXAPJ up 1.3% to 478.07

Nikkei up 2.4% to 20,038.97

Topix up 2.8% to 1,512.53

Hang Seng Index up 0.8% to 25,835.70

Shanghai Composite up 0.7% to 2,533.09

Sensex up 0.5% to 35,855.89

Australia S&P/ASX 200 up 1.1% to 5,683.19

Kospi up 1.3% to 2,037.10

German 10Y yield fell 1.3 bps to 0.195%

Euro up 0.4% to $1.1443

Italian 10Y yield rose 3.8 bps to 2.538%

Spanish 10Y yield fell 1.0 bps to 1.464%

Brent futures up 3.1% to $58.81/bbl

Gold spot up 0.4% to $1,290.84

U.S. Dollar Index down 0.3% to 95.88

Top Overnight news from BBG

U.S. and Chinese officials are set to begin trade negotiations on Monday in the hope of reaching a deal during a 90-day truce between President Donald Trump and his counterpart Xi Jinping.

Chinese Vice Premier Liu He -- top economic adviser to President Xi Jinping -- unexpectedly attended the first day of talks aimed at resolving the trade dispute between the world’s two biggest economies, according to people familiar with the matter and a photo seen by Bloomberg

Detailed figures showing how the U.S.-China trade war is affecting imports and exports are among economic releases to be delayed this week as the partial government shutdown drags on

Theresa May stepped up her battle to persuade her opponents in Parliament to back her Brexit deal, warning the U.K. will be in “uncharted territory” if they reject her plan in a key vote this month

French Finance Minister Bruno Le Maire said the government is sticking to its growth forecast of 1.7% in 2019, even as he warned of risks from the international environment and the Yellow Vests protests in France

President Donald Trump said his administration is now planning a steel barrier on the U.S. border with Mexico rather than a concrete wall, even as he renewed a threat to invoke a national emergency as a way to circumvent Congress on border funding

German factory orders fell more than expected in November, though the numbers were distorted by airplane orders that masked signs of underlying momentum. Orders slid 1 percent from October, and posted a year-on-year decline of 4.3 percent, the biggest in more than six years

Asian stocks began the week higher across the board as the region took its first opportunity to react to the trifecta of bullish developments from last Friday including the blockbuster NFP jobs data, dovish comments from Fed Chair Powell and the PBoC’s 100bps RRR cut. ASX 200 (+1.1%) and Nikkei 225 (+2.4%) gained from the open with Australia led by strength in tech and miners, while the Japanese benchmark outperformed and initially rose by over 3% as it tracked the rally in its Wall St. counterparts. Elsewhere, Shanghai Comp. (+0.7%) and Hang Seng (+0.8%) conformed to the positive tone following the RRR cut announcement and with mid-level trade discussions set to resume between US and China today, although the mainland lagged its regional peers following a CNY 170bln liquidity drain by the PBoC. Finally, 10yr JGBs were softer with safe-haven demand dampened amid the rally across stocks, but with downside also stemmed by the BoJ’s presence in the market for JPY 1tln in JGBs with maturities spread across the curve.

Top Asian News

Taiwan Arrests Six Accused of Leaking BASF Tech to China

Temasek Said to Weigh Options for Stake in Retailer A.S. Watson

Indonesia’s Foreign Reserves Said to Jump to Seven-Month High

Musk Breaks Ground on Tesla China Plant, First Outside U.S.

Macau Gaming Cut to In-Line as MS Sees Revenue Declining in 2019

Major European indices are broadly in the red [Euro Stoxx 50 -0.5%] with underperformance seen in the FTSE 100 (-0.6%) after multiple downgrades within the index such as; Centrica (-4.6%), InterContinental Hotels (-2.1%) and Hargreaves Lansdown (-0.6%). Sectors are firmly in the red with the exception of IT which is the outperforming sector. Other notable stories include Tullow Oil (+1.7%) in the green after being upgraded at RBC. Ryanair (-1.0%) share prices are down as the Co are named the UK’s worst short-haul airline for the 6th consecutive year. In terms of pre-market news flow for the US, General Electric shares are up around 2.8% pre-market following reports that Apollo are considering a bid for the Co’s jet-leasing business. Elsewhere, Apple’s iPhone XR volume outlook for the initial 6-months of production has been approximately halved to 30-40mln units (WSJ). In recent news, Eli Lilly are to purchase Loxo Oncology for USD 8bln.

Top European News

German Factory Orders Slip as Euro-Area Demand Deteriorates

UBS Is at Early Stage of CEO Succession Planning, Weber Says

Danske Starts Investor Talks Amid $12b Debt Issuance Plan

BP Is Said to Plan Selling North Sea Shearwater Project Stake

In FX, the USD kicked the week off on the back-foot in a continuation of the sentiment seen on Friday after Fed Chair Powell opted to strike a more flexible approach to monetary policy than the one he was perceived to have had at last month’s press conference. As such, the DXY resides on a 95 handle after breaching 96.00 to the downside during Asia-Pac trade to a session low of 95.85. Subsequently, the greenback’s major counterparts have captured on the relative weakness of the USD to eke out mild gains with USD/JPY a key source of market focus. USD/JPY has drifted lower throughout the Asia-Pac and EU session’s with a low print of 108.04 as the move ran out of steam ahead of the psychological 108.00 level where there were said to be bids, with larger bids noted at 107.50. Of note, from a risk perspective, opening gains in European bourses proved to be relatively short-lived with EU cash bourses mostly residing in modest negative territory.

Elsewhere, gains for GBP vs. the USD have been relatively modest as political risk keeps prices anchored. Lawmakers return to Westminster this week and as such, Brexit-related commentary has ramped up significantly over the weekend. In terms of the latest state-of-play, May’s meaningful vote appears to be going ahead on the 15th despite reports last week acknowledging that it is unlikely to pass. As such, the likelihood of alternative scenarios such as a second referendum, no deal Brexit and a confidence vote continue to heighten but with a distinct lack of clarity on what the most like course of action will be. In terms of price action, GBP/USD is currently trading around the mid-point of the session’s 1.2719-55 range with Jan 2nd high of 1.2773 the next source of resistance should the USD concede further ground.

EUR has extended its recovery above 1.1400 vs. the USD with the move pausing for breath just under the 1.1450 level. Macro newsflow for the EZ remains light ahead of this week’s ECB minutes release with mixed retail sales and factory orders from Germany unable to sway investor sentiment. From a technical perspective, Lloyds suggest a clear break above 1.1500 could inspire a gradual recovery towards 1.1600 before an eventual move towards range highs of 1.1750-1.1850.

In commodities, Brent (+2.3%) and WTI (+2.3%) prices are higher with WTI just over the USD 49/bbl level; fuelled by speculation that negotiations which are staring today between China and the US may lead to an easing in tensions between the two economies. Friday’s Baker Hughes showed a decrease in oil rigs by 8 to 877, indicating that production may begin to slowdown although EIA data, also from last Friday, presented an unexpected build in crude inventories. Elsewhere, both Goldman Sachs and Societe Generale have lowered their 2019 average price expectation for Brent from USD 70bbl to USD 62.50 and USD 73/bbl to USD 64/bbl. With their WTI forecasts also lowered from USD 64.5/bbl to USD 55.5/bbl and USD 66/bbl to USD 57/bbl respectively. Gold (+0.5%) is in the green on dollar weakness following Fed Chair Powell’s Dovish comments regarding the future of rate hikes. Elsewhere, Chinese steel and iron ore are benefiting from the aforementioned commencement of US-China trade talks. Goldman Sachs cut 3-month copper price target to USD 6100/ton from USD 6500/ton but maintained 12-month copper forecast at USD 7000/ton, while it reduced base metals targets amid notable China deceleration.

Looking at the day ahead, trade is likely to dominate the early focus next week with a US delegation visiting China for two days of trade talks with officials. Meanwhile, it's a busy start to the week for data on Monday with Japan's December composite and services PMIs out overnight, followed by. Germany's November factory orders, UK December new car registrations and the Euro Area's January Sentix investor confidence and November retail sales data. In the US we'll get final November factory orders, durable and capital goods orders along with the December ISM non-manufacturing index. We will also get China's December foreign reserves data at some point during the day. Away from that, the Fed's Bostic is due to speak in the afternoon, while the ECB's Guindos is also slated to speak.

US Event Calendar

10am: Factory orders/durables data postponed by government shutdown

10am: ISM Non-Manufacturing Index, est. 59, prior 60.7

DB's Jim Reid concludes the overnight wrap

If you’re just getting back into the office this week then you might want to reconsider taking a few more days off as it feels like it’s been a lifetime in markets so far in 2019. We saw soft China data, an unprecedented cut to revenue guidance from the previously biggest company in the world in Apple, and a big drop in the latest ISM manufacturing reading initially lead markets much lower into Thursday night. However, we then did a complete U-turn on Friday when risk assets roared back thanks to a China RRR cut, a blockbuster US employment report which included the second biggest payrolls reading (312k) since August 2016 and joint-second biggest average hourly earnings reading (+0.40% mom) since February 2015, and comments from Fed Chair Powell which signalled a change in the policy reaction function of the Fed to being more nimble and flexible.

When all that was said and done the S&P 500 actually notched up a positive week (+1.86%) for the second week in a row. The VIX also dropped 6.96pts and the most since February last year. Meanwhile the STOXX 600 (+2.13%) had its best week since early November while in credit HY spreads in the US also finished 25bps tighter – thanks to an eye watering 40bps rally on Friday – for the strongest week since the first week of 2018. Brent oil (+9.31%) rose by the most in over two years and EM FX (+1.39%) by the most since February last year. The point-to-point moves for bond markets are a lot less eye catching with 10y Treasury yields for example just 5.1bps lower in yield however that does mask an intraday range during the week of just over 20bps and a low of 2.541% at one stage on Friday morning. Yields on 2y Treasuries were actually up +11.5bps on Friday alone and the most since 2015. No shortage of talking points then.

Risk assets really had Fed Chair Powell to thank for much of the above and the big question now is will this be the start of a positive momentum builder or will we see markets fade the rally once more. The hope that markets took from Powell was his signal of a likely pause in the Fed’s rate hiking cycle, something that wasn’t so apparent at the December FOMC meeting which left the market in a tantrum. He said that the Fed “will be prepared to adjust policy quickly and flexibly” and “will be patient as we watch to see how the economy develops.” Significantly, he also specifically mentioned the fall in equity prices and associated tightening in financial conditions, saying “we’re listening with sensitivity to the message that markets are sending.” Net-net, this suggests the price action over the last month has been enough to convince the Fed to stop and wait for further data before tightening policy further. Fed Funds contracts are still pricing in 8bps of cuts this year, although at one stage last week they were pricing in 18bps of cuts. The 2s10s curve is also still hovering at 17bps and the 2s5s flat however both are off their lows.

Looking ahead there’s unlikely to be much of a breather for markets this week with US and China trade delegates meeting today and tomorrow in Beijing, the UK Parliament resuming debate on the Brexit Withdrawal Bill from Wednesday, FOMC minutes on Wednesday, a US CPI report on Friday and plenty of Fedspeak including Powell once again (on Thursday) to keep us all busy.

Just on the US-China trade meeting, the US delegation will be led by Deputy US Trade Representative Jeffrey Gellish and is likely to involve mid-level officials on both sides. The talks will focus on technical matters, so it remains to be seen how pivotal this meeting will be. However, markets have become super sensitive to trade matters in recent weeks again, so expect there to still be plenty of attention on any news that trickles out. The South China Morning Post is also reporting that President Trump may hold talks with Chinese Vice President Wang Qishan in Davos later this month so there’s likely to be reasonable focus on how talks this week go in anticipation of that.

As for the FOMC minutes this week, our US economists expect the text to provide more colour on the Committee’s thinking about several key issues for market participants – namely their views about headwinds from slowing global growth, progress on the Fed’s balance sheet strategy, and the debate around the neutral rate. As for Powell, it would be a surprise if we got anything new versus what was said on Friday however we are also due to hear from Vice-Chair Clarida on the same day so it’ll be worth seeing if a similar message is repeated. As for US CPI, the consensus is for a +0.2% mom core reading which should be enough to hold the year-over-year rate at +2.2%. Encouragingly for the Fed our US economists also note that shorter term measures, namely 3m and 6m annualized readings, should rise to +2.43% and +2.11% respectively.

All that to look forward to then. In terms of the weekend just gone it’s actually been a (much welcomed) quiet one for headlines. President Trump has again renewed a threat to declare a national emergency on the border wall issue over the next few days however that doesn’t appear to be bothering markets in Asia this morning with the Nikkei (+2.77%), Hang Seng (+0.67%), Shanghai Comp (+0.44%) and Kospi (+1.54%) all benefiting from Friday’s rally on Wall Street and China’s RRR cut. S&P 500 futures are also up +0.32% in early trade this morning while there’s across the board gains for the majority of currencies across Asia. Treasuries have held onto Friday’s move however WTI oil is up another +1.46% in the early going this morning.